How Credit Card Processing Works

The Basics

How transactions are processed

The first step is understanding how a transaction gets processed. The diagram to the left shows this simple process. Second is to understand how the fees are charged. As you can see there are three players involved in the transaction process.

1. The CARD ISSUING BANK this is the bank that issued the credit card. Example Chase Bank®, Wells Fargo® or Bank Of America®

2. The ACQUIRING BANK is the processor that communicates to receive an authorization on a credit card.

3. The PAYMENT BRANDS are Visa®, MasterCard®, Discover® and Amex®.

Know who makes what portion of the total fees collected from your merchant account.

Interchange Plus Pricing vs. Tiered Pricing

Interchange Plus Pricing vs. Tiered Pricing

When a potential new customer calls in, nine times out of ten the first question they will ask is, “What are your processing rates”? Most people just want to know what are the rates and they don't consider all of the other factors that are important when it comes to shopping for a merchant account.

Throughout the industry it is common to find merchant service providers advertising flat percentage rates for tiered pricing. In fact, I see television commercials or come across websites that have flat rates advertised without the company having any information about the merchant, products and or services being sold and the type of business. Something else I have noticed, is that I have yet to find a merchant service provider that addresses interchange pricing.

What is interchange pricing and why is it important?

First, it is critical that we understand how the industry is structured and operates. Visa® and MasterCard® are organization(s) or conglomerate of banks. These banks get together and decide what interchange is going to be based on the type of credit cards that are being used in the market. For example, consumer credit cards, debit cards, rewards cards, corporate credit cards, etc. all have different rates associated with them. The second factor is how the credit card is processed or performed. For example, is the card swiped through a machine in a retail location? Is the card number keyed into the machine or keyed in through the internet? Is the business a retail or internet merchant? All of these issues affect the rate the merchant will pay when it comes to processing the credit card.

The card issuing bank now comes into play because the banks set up interchange rate charts that are tied to the customer's credit card. So, when the transaction is performed a rate applies to that card. Now is where the issue of a flat tiered rate or interchange pricing comes into play. If a merchant is setup on a flat tiered rate plan, the transaction defaults into one of three tiers. If the merchant account is *setup under interchange pricing then the merchant pays a pre-determined amount above the rate tied to that credit card.There are more than 1000 interchange rates in the market today. If your business is a coffee shop or a utility business, different interchange rates apply to different businesses. Coffee shops sell small ticket items and can qualify for a small ticket interchange rate which has a lower transaction fee and discount rate which will save money when running a lot of transactions, a utility company has no discount rate to pay but just a transaction fee to run a transaction. Merchants that are setup on tiered program will not get these savings, which makes your bottom line more expensive. If merchants only ask what is my percentage rate, they are not taking into account the entire cost of having a merchant account and will be surprised when they receive their first processing statement. All of these factors will affect the fee structure that the merchant is charged when a credit card is accepted. This is why it is critical that the merchant understands what interchange levels are and how they affect their pricing. If a processor quotes a flat tiered rate, the merchant will not get to take advantage of the actual interchange rates that applies to each transaction. Every card will have the same flat percentage rate applied. In the long run, this can add up to hundreds or thousands of dollars in fees that the merchant must pay. With interchange plus pricing there is no way to pad the rates or put lower rates in a higher tiers.

What happens to your Credit Card rates over time?

Both Visa® and MasterCard® adjust rates twice a year. Every spring and fall these go into effect. Now this is what the processors love because it gives them a reason to raise your rates and make more profit on your account. Typically when rates are adjusted some rates increase and some actually decrease, however if you're setup on a tiered program you won’t ever see your rates decrease because the processor will keep the difference as profit. Frequently new interchange levels are added by Visa® and MasterCard®. So let's say you have 30 interchange levels that are getting billed at the qualified rate and Visa, MasterCard either increases one rate or adds a new interchange. What happens is most processors will raise the entire tier on the merchant to compensate for the increase even though maybe only 5% of your transactions would be affected by this increase or new interchange level. So every 6 months you will notice that your rates will be increased. When you have an Interchange Plus program you will always pay the exact interchange level cost. So you know the processor isn’t making anything extra on your account and if a rate decreases that saving will be passed to you as well. This is a much cleaner way to do business without hiding information from you as a merchant. Most agents don’t even know how Interchange Plus pricing works, therefore they sell you what is easiest or what they can make the most money because that is what they are taught by the processor.

How do I know if I am being charged a tiered rate?

The easiest way to tell is that the agents will use terms such qualified rate, mid-qualified rate or non-qualified rate. Here is how those rates are generally determined:

What happens with a tiered pricing program is that there are essentially three pricing buckets and each bucket will get 30 or more interchange rates bundled into a specific tier. Regardless of the interchange level that applies to the credit card, it will default to the next highest level so that the processing bank does not lose money on a transaction. So, a rewards card has a higher interchange rate than a debit card. No matter how the transaction is processed, the rewards card automatically defaults to the Mid-Qualified rate even if it was a swiped transaction causing the merchant to pay a higher fee. The merchant will not typically know that this is the case because the monthly statement usually does not list this level of detail. These statements tend to hide the fees through inconsistent categories, surcharges, past posting and hidden costs.

With Interchange Plus pricing, the merchant will get charged the actual interchange rate plus the mark-up margin. For example, if a merchant pays 25 basis points above interchange and they process $10,000.00 at a particular interchange level, then the merchant knows they are paying $25.00 in actual credit card processing fees. Additionally, the monthly statement will contain these transparent details. As a business owner, you can forecast and budget for the amount of the actual fees and price your products and/or services accordingly.

This presents an opportunity to the business owner to educate themselves as to how certain transactions are processed and why. If certain transactions are not being processed correctly to take advantage of the best rate, then a business owner can teach their employees how to do it correctly to save on fees. This takes more time and energy on the front-end, but it can literally save you thousands of dollars in processing fees.

This is the way that large merchants have had their credit card processing fees assessed for many years. Now, it is possible for small to mid sized merchants to take advantage of this pricing as well. GDpay is a company that is leading the way in educating business owners about interchange pricing and how it can benefit their bottom line. Contact an agent at GDpay for more information today!

Complete Credit Card Processing Guide

Emerging Market Processing Programs

The Basics

Emerging Market Processing Rates

It’s amazes me how many merchants are not getting the discounted “Emerging Market Rates” that are designed to save specific business types on processing fees. GDpay is focused on making sure that if your company qualifies for these discounts that the savings are being passed to you and your business. We accomplish this because we understand the correct way to set up your merchant account with the correct MCC codes. Visa and MasterCard recognizes different companies as "Emerging Market.” Sometimes we setup two separate accounts so both card associations give you the lowest rates. This usually works well if you process over 10k per month. Implementing this knowledge is the most important factor. Let our committed staff help you find the best processor for your specific need. With Interchange Plus pricing along with the Visa's "Emerging Market" rates we save most companies 25% or more compared to their current processor pricing.

Interchange Optimazation

Visa and MasterCard has created a special Business-to Business (B2B) and Business-to-Government (B2G )interchange category that offers lower processing rates on all Visa business, commercial, purchasing and government credit card transactions. The B2B rate can be any where to 0.50% to 0.75% percent lower that a merchant pays for interchange or more than the normal processing rates offered to other industries. GDpay has a list of eligible industry types that can take advantage of these savings. The B2B rate will reduce your monthly processing fees by an average of 10-20%. When processing large transactions over $5000, GDpay can help you reduce your interchange fee even more by passing extra data.

Large Ticket Credit Card Transactions

Many businesses need to process credit card payments that average over $5,000 per transaction. The Card Associations (Visa) have specific interchanges that address these requirements which minimizes the costs of processing theses transactions. Businesses that qualify in this category often process transactions capturing level 2 and level 3 data for corporate and government cards. Level 2 data is designed to support B2B credit card transaction, since the majority of the cards accepted in this environment are corporate cards. Level 3 data is designed to support business-to-business and business-to-government payment processing, the majority of the cards accepted in this environment are corporate and government cards.

Before using GDpay we never knew that by entering level 2 & 3 data that we could qualify for lower interchange rates. Also they have a fantastic system that tells us which cards qualify and automatically passes the correct data before the transaction settles. Thank you GDpay!! This saved our company over $30k annually.

Convenience Fees & Surcharging Credit Cards

Accept Credit cards without incurring fees

MasterCard® Rules on charging a fee

MasterCard states that any convenience fee must comply with the following:

-Must be properly disclosed to the cardholder in advance

-Cannot discriminate against or discourage use of the MasterCard cards or brand in favor of any payment acceptance brand deemed by MasterCard to be a competitive brand, including American Express, Discover, and Visa

-Doesn’t have to be assessed on cash, check, automated clearinghouse (ACH), or personal identification number (PIN) based debit payments

-Can be assessed as either a flat per transaction fee, a variable or tiered rate fee based on the amount owed, or a fixed percentage of the amount owed.

-Elementary and secondary schools for tuition and related fees and school- maintained room and board

-Colleges, universities, professional schools and junior colleges for tuition and related fees and school-maintained room and board

-Local, state and federal courts of law that administer and process court fees, alimony and child support payments

-Government entities that administer and process local, state and federal fines

-Local, state and federal entities that engage in financial administration and taxation

-Government services - merchants that provide general support services for the government

is a family owned debt free Merchant Provider that is committed to helping merchants navigate through the market place to find the most intuitive processing solutions. Since 1996 we have helped thousands of merchants with credit card processing.